For most investors, especially those in taxable accounts, effective investing should include strategies that support growing wealth while helping minimize tax burdens. Mutual funds often distribute capital gains annually, taxing investors even if they haven’t sold shares. In 2023, when the Russell 3000 (U.S. stock index) returned 26% (Source: Morningstar Direct), these distributions reduced after-tax performance for many. Custom indexing and proactive tax management can provide a tax-efficient approach to help preserve wealth and align your portfolio with your financial goals.
Tax-loss harvesting is a key strategy to enhance after-tax returns. It involves selling securities at a loss to realize capital losses, which can offset gains from other investments or mutual fund distributions, reducing taxable income. Reinvesting the proceeds helps maintain market exposure while managing tax liability. In 2023, over one-third of Russell 3000 stocks posted negative returns despite the index’s strong performance, creating tax-saving opportunities missed by broad ETFs or mutual funds (see chart below). Custom indexing supports this by allowing direct ownership of individual securities, unlike the rigid structure of traditional funds, enabling strategic loss harvesting.
Source: Orion Advisor Solutions
Custom indexing allows you to design a portfolio tailored to your risk tolerance, financial objectives, and values, offering flexibility not found in conventional ETFs or mutual funds. Combined with proactive tax management, it helps reduce tax impact through ongoing portfolio monitoring. Regular reviews identify opportunities for tax-loss harvesting, deferring gains, or using tax-advantaged accounts like IRAs. This year-round approach helps minimize tax erosion, supporting wealth accumulation over time by leveraging market volatility for tax advantages while staying aligned with your investment strategy.
Key Takeaways for Investors:
- Tax-Loss Harvesting: Use losses from declining securities to offset gains, even in strong markets like 2023. Reinvest proceeds to maintain market exposure.
- Personalized Portfolios: Custom indexing tailors investments to your goals, unlike rigid ETFs or mutual funds.
- After-Tax Efficiency: Tax-focused strategies aim to reduce tax burdens and support wealth growth.
- Continuous Monitoring: Regular adjustments help sustain tax benefits across market cycles.
Custom indexing and proactive tax management offer a tailored, tax-efficient approach to investing. To discuss how these strategies can align with your financial objectives, please reach out to your RetirePath financial advisor.
The Russell 3000 Index is a market-capitalization-weighted equity index maintained by FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks, which represent about 98% of all U.S.-incorporated equity securities.
The concepts in this presentation are intended for educational purposes only. They may not be suitable for your client’s particular situation. The suitability of any specific product or strategy will be dependent upon your client’s particular situation.